Are Earnings Predictable? Evidence from Equity Issues and Buyback Announcements

We find that earnings announcements that follow equity issues and buyback announcements have predictable market reactions. Four-factor abnormal returns to earnings following buyback announcements are higher by 5.1% than similar returns to earnings following equity issues over the (-1,+30) window; the difference is 2.2% when unadjusted returns are used. The evidence is consistent with the notion that markets do not fully reflect information that is embedded in voluntary corporate actions. The drift in these returns is unrelated and distinct from the post-earnings announcement drift. For example, we find positive drift for firms making buyback announcements even when they exhibit negative earnings surprises and find negative drift for firms issuing equity even when they show positive earnings surprises. Since the study looks at short periods around earnings announcements, it does not suffer from benchmarking errors that may influence long-horizon returns